Takeaway: Part of the "services' Jerome Powell discussed yesterday

Chart of the Day | Health Care: PCE's Missing Inflation - chartoftheDay2023.02.01

Yesterday, Federal Reserve Chairman Jerome Powell while giving his "higher for longer" speech that included a concession the problem is labor shortages, something the U.S. has not wrestled with for a very long time. Specifically, he believes still to wash through the inflationary spin cycle are non-housing services, of which health care is a hefty chunk, almost 20%.

We have shared this article from the Dallas Fed but it bears republishing in light of Powell's comments. While monetary policy has been effective in destroying demand for goods, though you may not know from the close, it is much more difficult to have a similar effect on health care. Prices changes are set or limited by statute and often designed to accommodate inflation. Contracts between providers and payers are renegotiated every two to three years. so it could take several quarters to reset higher.

Additionally, health care runs on labor. As long as shortages persist, providers are going to continue to ask for higher payments. While labor demand has softened in health care, job openings and wages remain elevated.

It is altogether possible that reimbursement updates via contract renewals or Medicare updates will put upward pressure on PCE beginning in January, which may come as a surprise for those in the pivot camp. Perhaps that upward bias is offset by other services components in the near term but, health care's negative influence on a return to 2% inflation may endure longer than anyone likes.

It could be years.

Let me know if you have any questions.

Emily Evans
Managing Director – Health Policy